Accumulate Siemens Ltd For Target Rs. 4,510 - Elara Capital
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Congregating tailwinds to prop capex cycle
Public capex at forefront, private participation to follow
In the past three years, the government’s capex push (through FY22- FY24BE at INR 22.5tn) led the momentum in capex cycle. But with the rise in average manufacturing capacity utilization in India to 76.3% in Q4FY23 from 68.6% in Q3FY20 (source: RBI), private sector capex too has pitched in. Led by PLI schemes, other sectors – power T&D, pharma, data center, metals, intralogistics, chemical, water, and cement – may also see strong impetus. So, SIEMNES (SIEM IN) expects sustained capex cycle in the medium term, from both the public and private sectors.
Energy business set for a spin-off
In December 2023, SIEM’s board initiated exploratory measures to examine the potential demerger of its energy segment. Also, the Board approved the incorporation of a wholly-owned subsidiary. In FY23, revenue from the energy segment stood at INR 60.8bn (31% of total revenue) and EBIT margin was at 13.7% (EBIT contribution at 34% of total FY23 EBIT). The demerger decision is in-line with the parent entity’s strategy to separate energy business globally. India’s energy business could likely be listed independently on exchanges by CY25 (source: company).
Margin dilution unlikely despite execution of a large order for locos
In Q2FY23, SIEM won a large order worth INR 260bn for 1,200 nos. 9,000 HP electric locomotives. This included manufacturing of locos in 11 years followed by maintenance for the next 35 years. Despite winning this order on aggressive pricing, the management assures no margin dilution over the execution period. The locos would be assembled in the Indian Railways factory in Dahod, Gujarat and propulsion systems would be provided by SIEM's facility in Nashik, Maharashtra.
Geopolitics to remain a key concern; India’s resilience comforting
SIEM is cautious on the geopolitical scenario and its impact on the supply chain. Also, given the run-up to general elections, some large public orders may be delayed. Meanwhile, SIEM is confident on India’s economic strength and resilience. Its key strategy focuses on localization, digitalization, sustainability, and capacity building. SIEM highlights semiconductor, batteries, and EV as emerging markets in India.
